Fail

"Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a 'bet against our clients.'"

That claim, from Goldman's letter to its shareholders,
is easily refuted. The S.E.C. has brought fraud charges on one of
Goldman deals known as synthetic subprime mezzanine collateralized debt
obligations, or CDOs. While most of these deals remain shrouded in
secrecy, one of them, Anderson Mezzanine Funding 2007, Ltd.
lays out its blueprint in sufficient detail so that we can pinpoint how
and why this transaction's failure was never in doubt.

With everyone focused on the US bond market, it was of course inevitable that the failed bond auction would occur not here, but in that other great liquidity pump and Keynesian playground: China. Market News reports that the Chinese Ministry of Finance was unable to sell all of its planned issuance of 91- and 273- day bills. The bond failures were attributed to increasing concerns of monetary tightening which, of course, would impact short-term rates and make investors skittish about locking up capital. Although being unable to fill a 3 Month order book is stunning - Chinese bond vigilantes are now officially on the prowl, and their (in)action guarantees either a hike, or much more serious liquidity withdrawal over the next 91 days, which would spell doom for stocks which trade now only on the combined efforts of the PBoC and the Fed to drown the world in colored pieces of paper. Throw in the unpredictable events of CNY revaluation, and the training wheels of the biggest reliquification experiment are about to come off. We caution readers not to be surprised if in light of these failed auctions, any overtures toward a CNY hike are indefinitely postponed.

Enacting a credible bankruptcy process to solve the too-big-to-fail problem, clarifying the Fed's umbrella supervision and financial stability roles, and enhancing market discipline are steps we must take to lower the probability of a future crisis. We could simplify the entire financial regulatory legislative initiative by focusing on these three key elements. We do not need huge new bureaucracies, or a complete restructuring of our regulatory agencies. - Charles Plosser

At our firm we frequently receive calls from clients and readers asking about the likelihood of the passage by the Congress in Washington of reform legislation regarding over-the-counter (OTC) derivatives, financial regulation and/or mortgage securitization. Our answer is small to none given the political trends and the state of the lobbies in Washington, most specifically the large bank lobby that protects the Sell Side monopoly in OTC derivatives and securities. The fact that Senator Richard Shelby (R-AL) is still apparently not comfortable with the entirely watered down House proposal to reform OTC derivatives, for example, tells you all you need to know. Stick a fork in it.

The difference between the world when Volcker was Fed chairman and today is the end of Glass Steagall. Instead of bailing out simple lenders, the Fed now faces the task of managing and saving giant securities and securitization platforms that are too big to manage in a rational fashion. Don't fool yourself into thinking that JPM chief Jamie Dimon or any CEO of a TBTF bank has the slightest idea what is really happening within their enterprise.

New year window dressing was responsible for the micro yields on bill auctions pre-New Year. Or so the theory went. So why did we just have another effectively zero bill auction? And no, the Lehman scramble for risk-free parallel is oh so very inappropriate here - after all funds have to window dress their Dec. 31 2010 results... Granted, a little early. So we ask, again, who is buying stocks when real money is willing to accept zero returns to park their cash in "risk-free" equivalents. Liberty 33 - once again, the podium is all yours.

For some reason Zero Hedge is prone to take a great deal of heat (both directly radiated and reflected) whenever we opine on the (rather obvious to us) prospect that interest rates might actually (quelle surprise) rise in this environment.  Today, rather than engage in "we told you so" gloating, or endure the repetitive pleadings of commentators that this or that Treasury auction was really a success if you just look a little deeper at the figures, we'll just quote Bloomberg quoting other fixed income observers on today's auction of two years, in an article "ambiguously" titled "U.S. 2-Year Yields Highest Since October After $44 Billion Sale."

One of the numerous adverse side-effects of the horrendous policy decision to start bailing out each and every risky bank, and thus allowing no more risk in any investment (for the time being), has been the very simple observation that massively mispriced risk has gotten concentrated to an unparalleled degree among very few players. The population of Big Banks has been massively trimmed (Goldman thanks everyone for allowing them to have massive Fixed Income bid/ask spreads) and now a mere five banks account for the bulk of loans, deposits, and derivative exposure. When the economy is faced with another Lehman event at some point in the future, when bailing one of the Big 5 is no longer feasible, the delayed consequences which have so far been successfully swept under the rug, will come back in time and bury any positive legacy that the Man Of The Year may have created. One indication that this time may be sooner than most think comes out of the St. Louis Fed itself, which has released a paper titled "The evolving size distribution of banks" in which it highlights the expected: big banks are getting bigger, and are holding a record share of all rosky assets. When the asset repricing moment occurs, absent an apriori renewal of Glass-Stagall, look for the inevitable moment of complete House Of Cards collapse.

The passage of time, in addition to being subject to dilation through the effects of e.g., relative velocity, also suffers numerous perceptual contortions depending on the observer's particular state of mind. For the purposes of day to day affairs, most humans not at relative velocities to their immediate surroundings that reach a significant fraction of the speed of light, would find these subjective changes normally accounting for the largest perceived deltas in the passage of time ("a watched pot never boils, etc.") Of course, as with most of the laws of nature, the regina scientiarum and, if you believe their analysts, even the laws of thermodynamics, when it comes to the ratings agencies, all bets are off and mere humans unable to shift their perceptions into rates more in line with geologic observations will be doomed to frustration and folly. So it is this morning with Moody's, which has, ever so subtly, maybe warned of what might someday develop into conditions that, in exactly the right environment, could potentially result in a downgrade for the Aaa rated United States and the United Kingdom... maybe sometime around 2013 or so, maybe. (Proving once and for all that Moody's finally fired analysts John Cusack and Amanda Peet).

Cue loud music which gets everyone up on their feet ...

Courtesy of the SIGTARP's latest report, the events on November 6 and 7th, when Wall Street lackey extraordinaire Tim Geithner decided to pay $27.1 billion to make all of AIG's counterparties whole, have attained even more granularity. The main thing disclosed is just how willing Geithner was to extract absolutely no concessions from AIG's counterparties, and how after putting in a token effort, the best he could do was to just get UBS to agree to a contingent 2% haircut, which would only be effective if all the other counterparties agreed to the same. Of course, this approach failed, and the final "make whole" bailout was a foregone conclusion from the beginning. That Tim Geithner approached his duty of "preserving" taxpayer capital with such disdain, would be grounds for immediately termination for cause in any normal, non-banana society. Alas, America has long ceased being representative of one.

Even as Tim Geithner was boldly lying today on national TV, claiming that he abhors the concept of too big to fail, and condemns moral hazard, behind everybody's back he, together with the entire Obama administration, was trying to pass a law that would shift TBTF from a temporary program into officially canonized law. This is a scandal that has gotten little recognition in most of the MSM: in essence it guarantees that the massive mega banks like Goldman Sachs, BofA, and JPM will take on so much disproportionate risk the next time around (and with a moral-hazard encouraging Federal Reserve as risk regulator virtually guarantees their implosion) that not only will they blow up spectacularly once again, but that their bailout next time around will surely force America, already strapped with trillions of new upcoming debt courtesy of stimulus after stimulus, into sovereign insolvency.

"The middle class became a resource to be pulled from - "the turkey at the thanksgiving dinner" - the middle class has gotten shakier and shakier, it has become hollowed out. The middle class makes us who we are. The middle class gives us political stability. It is safe to walk our streets because we have a middle class. And every time we hollow [the middle class] out we take the risk that something of what we know as America begins to die. That's what scares me." - Elizabeth Warren

The government is STILL defending too big to fail on several ridiculous grounds.

"There is a sense when one reads sufficiently educated publications that a lot of people feel betrayed by financial and economic forecasts. One can argue whether some analysts foresaw what was about to unfold as early as 2006, but fact is most people had it completely wrong." - Nic Lenoir